Summary of Higher Education Budget Reconciliation Act of 2005
Committee Print, October 25, 2005
1. 50/50 rule modified to not apply to courses offered by telecommunications
2. FFEL reauthorized through 2012
3. Stafford loan limits increased as follows
Freshman: $2,625 --> $3,500
Sophomore: $3,500 --> $4,500
Grad & Professional Students: $10,000 --> $12,000 (unsub)
4. Changes to Interest Rate Formulas:
Repeals the change to fixed rates (6.8% Stafford, 7.9% PLUS) that
would have commenced on July 1, 2006, retaining the current interest
rate formulas (91-Day T-Bill + 2.3% Stafford and 91-Day T-Bill +
3.1% PLUS during repayment, 60 basis points lower during in-school
and grace periods).
Consolidation Loans would switch from the current fixed rate
formula (weighted average of current rates rounded up to the
nearest 1/8th of a point, capped at 8.25%) to a borrower choice
of a fixed or variable rate:
For Stafford Loans:
Variable Rate: 91-Day T-Bill + 2.3%, capped at 8.25%
Fixed Rate: 91-Day T-Bill + 3.3%, capped at 8.25%
For PLUS Loans:
Variable Rate: 91-Day T-Bill + 3.1%, capped at 9%
Fixed Rate: 91-Day T-Bill + 4.1%, capped at 9%
Observations:
- Borrowers would be paying a 1% higher interest rate
for the privilege of locking in a fixed rate.
- The use of explicit formulas, instead of the weighted
average, eliminates the ability to lock in the in-school
rate. This will cause students to delay consolidations
until the end of the grace period or wait until they enter
repayment, since there will no longer be any benefit to
consolidating while they are still in the grace period.
5. Requires the collection of a guarantee fee of 1% which may
not be retained by the lender for loans disbursed after July 1,
2006. Guarantee agencies will no longer be able to waive the 1%
guarantee fee. This guarantee fee may not be waived under voluntary
flexible agreements.
6. With graduated repayment, allows borrowers to opt for a different
graduated payment ratio.
7. Adds delayed repayment, in which the borrower can make payments
that are at least the interest or $50/month, whichever is higher,
for a period of up to two years, and then commences with one of the
other repayment plans.
8. Schedules a reduction in origination fees from the current 3% (+ 1%
guarantee fee) as follows:
FFEL: Origination Guarantee Total
2006-07: 2.0% 1.0% 3.0%
2007-08: 1.5% 1.0% 2.5%
2008-09: 1.0% 1.0% 2.0%
2009-10: 0.5% 1.0% 1.5%
2010+: 0.0% 1.0% 1.0%
DL: Loan Fee
2006-07: 3.0%
2007-08: 2.5%
2008-09: 2.0%
2009-10: 1.5%
2010+: 1.0%
9. DL repayment incentive restrictions: Prohibits DL from waiving the
loan fee or providing repayment incentives before the borrower
enters repayment. This prevents DL from offering financial
inducements to encourage borrowers to borrow from DL. It does not
appear to prohibit DL from offering repayment incentives that
commence at repayment that are comparable to those offered by FFEL
lenders, such as a rebate of the loan fees or interest rate
reductions, provided that they are cost neutral.
Although these restrictions do not apply to FFEL, the illegal
inducements paragraphs in HEA 435(d)(5) prohibit FFEL lenders from
waiving the origination fee (and this legislation already prohibits
guarantee agencies from waiving the guarantee fee).
Although some lenders currently rebate the origination fee after
the loan enters repayment, this practice is likely to change under
the new legislation. Under current law, most students who
consolidate do so before entering repayment. Since the proposed
legislation would eliminate the incentive to consolidate before
entering repayment, fewer lenders are likely to offer fee rebates
at repayment. More likely lenders will offer discounts that are
spread over the lifetime of the loan (e.g., interest rate
reductions) or discounts which are paid only after the borrower has
stuck with the lender for a specified number of years (e.g.,
rebates after 'n' years, making the last 'n' payments on the loan).
10. Consolidation Loan origination fees ("offset charges").
FFEL lenders are allowed to collect a consolidation loan
origination fee of up to 1.0%. DL is required to collect a
consolidation loan origination fee of 1.0%. The origination fees
may be capitalized.
This provision is apparently intended to provide a disincentive to
consolidation. The repeal of the single holder rule increases
competition. This provision reduces the effectiveness of
consolidation loans as a source of competition among lenders,
reducing the pricing pressure on FFEL lenders.
11. DL consolidation of FFEL loans is restricted to borrowers
seeking income contingent repayment plans for default aversion or
for whom a lender has denied a consolidation application. FFEL
lenders remain able to consolidate DL loans after they enter
repayment.
12. The in-school early repayment status consolidation loophole is repealed.
13. The ability of married students to consolidate their loans
together is repealed.
14. Repeals the single holder rule effective July 1, 2006, but
requires the borrower to notify the single holder that he/she is
seeking a consolidation loans.
15. Requires various consumer notices at consolidation.
16. Eliminates in-school DL consolidation.
17. Adds a deferment of up to 3 years for military personnel on active duty.
18. Amends provisions for loan forgiveness in areas of national need
to include early childhood educators, nurses, foreign language
specialists, librarians, highly qualified teachers (bilingual
education or low-income communities), first responders in
low-income communities (firefighter, police, EMT), child welfare
workers, speech language pathologists, and other areas of national
need designated by the Secretary of the US Department of
Education. Requires five consecutive years of service, and limits
the forgiveness to $5,000. No double dipping for national service
award recipients or for teachers in national need areas.
19. Makes repeal of 9.5% floor permanent.
20. Increases the fees charged to lenders by 50 basis points for loans
first disbursed starting July 1, 2006.
21. Reduces the insurance percentage from 98% to 96%. Lenders
designated as exceptional performers will continue to be
reimbursed at 98%.
22. Forbearance agreements no longer need to be made in writing, and
need only be confirmed by sending a notice to the borrower.
23. Limits guarantee agency collection costs for defaulted loans that
are consolidated to 18.5% of the outstanding principal and
interest.
24. Requires reporting to each national credit bureau, as opposed to
just one.
25. Changes School as Lender to require 10% default rate, prohibits
loans to undergraduate students, prohibits loans to students who
are not enrolled at the institution, requires contracts to be
awarded on a competitive basis, requires loans to offer an
origination fee or interest rate (or both) that are lower than the
statutory requirements, requires an annual compliance audit,
eliminates PLUS and Consolidation loans from the SAL program,
requires all proceeds (including special allowance payments,
interest subsidies, borrower interest payments, and sales
proceeds) to be used for need-based grants, and requires that the
proceeds supplement and not supplant non-Federal funds.
The supplement and not supplant requirement will be difficult to
enforce, given the difficulty of identifying a reduction in an
increase in non-Federal aid.
26. Expands simplified needs by allowing students to qualify who
qualify under another means-tested federal benefit program, such
as supplemental security income (Title XVI of the Social Security
Act), the food stamp program, the free and reduced price school
lunch program, temporary assistance to needy families, and WIC.
27. FAFSA changes.
- Early Estimates: Allows families to submit the FAFSA up to four
years prior to enrollment in order to obtain a non-binding
estimate of EFC.
- EZ FAFSA: Simplified form for students who qualify for
auto-zero-EFC.
- FAFSA on the Web shall use skip logic to simplify the form as
appropriate.
- Requires a printable electronic form of the FAFSA (Adobe PDF
format?) that may be used to submit the FAFSA.
- Streamlined renewal FAFSAs.
- Encourages the Department to reduce the number of data elements
on the FAFSA.
- Requires the Department to allow submission before January 1.
28. Prohibits fees from being charged for use of the FAFSA and EZ FAFSA.
Fees may only be charged for value-added services, and entities
that charge such fees must provide clear and conspicuous consumer
notices that the FAFSA is free and can be completed without
professional assistance and provides the fafsa.ed.gov web site
address for online completion.
29. Expands the definition of independent student to include students
who are in foster care or were in foster care through age 18.
30. Student income protection allowance increased from $2,200 to
$3,000 with subsequent increases pegged to the December-December
CPI, rounded to the nearest $10.
31. PJ Authority. Adds additional examples of special circmstances,
including:
- student status as a ward of the court at any time prior to
age 18
- student status as an individual adopted at or after age 13
- student status as a homeless or unaccompanied youth
32. Modifies the definition of independent student to include members
of the Armed Forces serving on active duty for other than training
purposes.
33. Changes to Section 529 Prepaid Tuition Plans and College Savings Plans:
- Distributions that are not included in AGI will not be reported
on Worksheet B as untaxed income.
- Prepaid tuition plans and College Savings Plans will be counted
as an asset on the FAFSA, with the value being set to either the
refund value or the current balance of the account.
- Qualified tuition programs will not be counted as an asset of a
dependent student (but can be counted as an asset of an
independent student).
34. Excludes from net assets the net value of a small business (<= 100
full-time equivalent employees) that is owned and controlled by
the family.
35. State aid that is targeted at a component of COA may be excluded
from both estimated financial aid and COA.
36. Expands the definition of eligible program to include distance
education.
37. Requires completion of repayment of Title IV funds fraudulently
obtained before being eligible for new federal student aid.
38. Prohibits student loans for individuals subjected to involuntary
civil commitments for sexual offenses.
39. Expands data match with the IRS to include all information by
students and parents on Federal income tax returns.
40. Restricts the drug offenses eligibility suspension to just those
offenses that occurred while the student was receiving Title IV
aid.
41. Requires the compilation of a directory of state postsecondary
education programs and services.
42. Cancels student loan debt for victims of the 9/11/01 terrorist
attacks and for survivors (spouses, parents) of first responders
who died or became permanently and totally disabled due to
injuries sustained in the terrorist attacks on September 11, 2001.
43. Allows waivers and modifications of statutor and regulatory
provisions in connection with a Gulf hurricane disaster. Also
cancels various financial obligations by students and schools,
including student loans disbursed for the affected enrollment
periods. Also has a temporary 6 month deferment of repayment
obligations on other student loans. Excludes amounts received for
a cancelled enrollment period from relevant grant and loan limits.
[Although this is not limited to hurricane Katrina, it is limited
to a "Gulf" hurricane disaster. Congress needs to establish more
general criteria for disasters meriting statutory/regulatory
waivers and modifications and permanently encode them into law,
instead of continually issuing one-time bandaids every time there
is a new disaster.]
44. Requires notification of students and parents who qualify for
means-tested Federal benefit programs (e.g., free/reduced cost
school lunches, food stamps, WIC, etc.) of potential eligibility
for a maximum Pell Grant.
45. Looks like the proposals to phaseout the historical allocation
formula for campus-based aid has been dropped (this previously
appeared in HR 609). Likewise for Year-Round Pell Grants,
increases in Pell Grant authorized levels, increases in Perkins
loan limits, State Scholars program.